A New Theory Concerning the Credibility and Success of Threats to Sue.

Negative-expected-value (NEV) suits are ones in which the expected litigation costs exceed the expected judgment. This article offers a new theory for the credibility and success of plaintiffs with NEV suits. The theory is based on recognizing that litigation costs are generally not incurred all at once but rather over time; this divisibility of the litigation process is shown to play a crucial strategic role. The analysis identifies the conditions under which a plaintiff with an NEV suit will have a credible threat and succeed in extracting a settlement. It is demonstrated that plaintiffs have credible threats in a much wider set of cases--including in numerous small-stakes cases--than has been suggested by prior economic analysis of the subject. Copyright 1996 by the University of Chicago.